Teradyne, Inc. History

Public CompanyIncorporated:1960 Employees: 4,100 Sales: $554 million Stock Exchanges: New York SICs: 3699 Electrical Equipment and Supplies, Not Elsewhere Classified

Company History:

Teradyne, Inc. is a leading producer of systems to test electronic and computer components while they are being manufactured in factories around the world. The company was founded in the early 1960s, when the semiconductor industry was in its infancy, and Teradyne pioneered many early testing systems, becoming the dominant player in its field. By the mid-1970s, however, the company had lost some of its technological edge, and it began to suffer inroads on its market share from competitors. In the 1980s, the increasing globalization of the semiconductor industry put Teradyne under further pressure. The company responded by investing heavily to update its products and to establish a worldwide presence.

Teradyne was founded in 1960 by two 32-year-old graduates of the Massachusetts Institute of Technology, Nicholas DeWolf and Alexander V. d'Arbeloff. The two had first met as students when they lined up alphabetically in a Reserve Officer Training Corps class. After graduation, DeWolf became an engineer at Transitron, a company located in Wakefield, Massachusetts, that worked in the fledgling semiconductor industry. In the 1950s, DeWolf gained widespread renown in his field for his innovative applications work and use of germanium diodes and other components.

By the end of the decade, however, DeWolf had become bored with the security and routine of corporate life. He quit his job, planning to start another company but with no firm plans as to how. In the fall of 1960, he hooked up with his old college classmate d'Arbeloff, and the two decided to go into business together. To begin, they chose a name for their venture. "It had to have a 'D' in it, DeWolf later told The New Englander. He continued: "'Tera' is the prefix for 10 to the 12th power and 'dyne' is a unit of force. To us, the name meant rolling a 15,000-ton boulder uphill."

Once they had chosen a name, DeWolf and d'Arbeloff chose a location for their business, taking care that both men would be able to walk to work and that they would be near the center of mass transit lines, so that factory workers could commute easily. The space they chose was a loft over Joe & Nemo's hot dog stand in downtown Boston. After raising $250,000 in financing, of which $25,000 came from their own savings, the partners opened their doors early in 1961.

The first product Teradyne created was a "go⁄no-go" diode tester. The partners spent all their capital designing and producing this device and then tried to sell it to their friends in the diode industry. Initially, the product met with some resistance. "That's a pretty low point. When your friends not only say 'no,' they say 'no' and 'we feel sorry for you'," DeWolf later recalled in The New Englander. By the end of the year, however, Teradyne had sold one of its devices to the Raytheon company, reaping $5,000. Altogether, Teradyne had grown to include nine employees.

The work force included 20 people by the end of 1962, and the company had sold an additional 18 diode testers. Growth continued in the following year, when Teradyne sold 59 testers, worth $431,000, and the staff rose to 35 people. This rapid growth was a testament to the success of the unique business philosophy of DeWolf and d'Arbeloff. Rather than attempting to meet customer demands, they undertook to understand what their customers were doing as well as the customer did, then built a machine that their clients needed and taught them how they could use the new device.

The product that DeWolf invented was a diode tester that enabled manufacturers to produce diodes more cheaply. At the time that Teradyne first marketed this product, sophisticated testing devices were limited to the laboratory, while factory floors got by with crude, slow, and inexact hand-testers. Teradyne's innovation was to bring high-quality diode testers from the laboratory to the manufacturing process.

On the strength of this advance, Teradyne experienced rapid growth in the early 1960s. It soon branched out from diode testing to other kinds of component testing, including resisters, transistors, integrated circuits, and zener diodes. Its list of semiconductor manufacturing clients also expanded.

In 1966, Teradyne introduced a new product, which created an entire market that the company then virtually owned for the next ten years. As more circuits and transistors were crowded onto tiny slivers of silicon, picking out bad chips in semiconductors manually became impossible. After DeWolf realized that testing routines for some sophisticated components had become too complicated to program by hand, Teradyne began to implement minicomputers in its testing devices, thereby creating the automated testing equipment (ATE) industry. The use of ATE proved essential to further industrial development in semiconductor design and manufacture.

Initially, Teradyne purchased minicomputers from the nearby Digital Equipment Corporation, becoming that supplier's largest customer at one point. Eventually, however, DeWolf designed his own minicomputer for use in Teradyne's products. One such early effort, the J259, a computer-controlled integrated circuit tester, "made Teradyne the company it is," DeWolf told The New Englander. Although it did not perform highly sophisticated tests, it did basic, essential processes very reliably. "We wanted to build a company with a reputation for doing simple things well," DeWolf elaborated.

With the growth in demand for ATE, Teradyne's facilities over the hot dog stand also expanded. In 1967, the company moved to a nearby eight-story building that had previously been a leather market. By the end of the 1960s, Teradyne had doubled its sales for six of its first ten years in existence. In 1969, the company's sales exceeded $15 million, and profits topped $1.2 million. The following year, Teradyne sold stock to the public for the first time.

Despite Teradyne's success in the 1960s, the spring of 1970 brought the first of many cyclical downturns in the semiconductor industry, as both computer makers and the military cut back on consumption. This, in turn, cut down on orders for Teradyne's equipment. From April 1970 to April 1971, the company did not receive one order from the customers to whom it had previously sold 80 percent of its products. With its rapid growth, Teradyne had neglected to diversify its customer base sufficiently, and the company began to lose money.

In the summer of 1970, Teradyne began to take steps to prevent further crashes in its market. The company was reorganized into seven different product groups, and it started work on four new areas. Among the initiatives it got underway were test systems for semiconductor users as well as makers, since customers had started to inspect the electronics products they bought more carefully.

In addition, Teradyne hired a direct sales force, instead of relying on manufacturers' representatives, in hopes of increasing sales. Despite these moves, however, the company was forced to lay off 15 percent of its work force, or 100 employees, in the fall of 1970.

By the summer of 1971, the semiconductor industry appeared to be recovering, and DeWolf decided that he would depart from Teradyne, which, like his last employer, had grown too large and bureaucratic to hold his interest. He left the company in the hands of his partner, d'Arbeloff, and, by the end of that year, Teradyne appeared to have weathered the semiconductor depression. The severe cutback in production had created a temporary semiconductor shortage, so manufacturing, and demand for Teradyne's products, boomed briefly.

In addition, diversification meant that half of Teradyne's products were now sold to new customers. To further broaden its customer base, Teradyne began a program in 1972 to develop a testing device for telephone systems, called 4Tel.

The expansion in the scope of Teradyne's activities in the early 1970s lead to expansion of company facilities. Teradyne established a connector manufacturing division in Lowell, Massachusetts; a wire-wrapping operation in Schaumberg, Illinois; and a digital integrated circuit testing division in Chatsworth, California. In addition, the company purchased a 225,000 square-foot building to accommodate further expansion in Boston. By the fall of 1974, the company's payroll had grown to include 1,300 people.

This number soon shrank, however, as Teradyne suffered the effects of its failure to make the transition from specialized testing equipment to general-purpose devices, and also as the semiconductor industry went into a slump. In October 1974, the company cut its work force, and, in November, it was forced to temporarily shut down most manufacturing operations and further lay off employees. The following year, Teradyne laid off another 15 percent of its workers.

By 1976, the market was once again looking robust, and Teradyne's sales rose to $54 million, with profits of $2 million. The company's financial returns continued to improve throughout the 1970s, as revenues reached $165 million, and earnings hit $11 million.

Despite this outward growth, however, Teradyne's long-term prospects were growing dimmer, as the company rested on its laurels in the mid-1970s. Rather than aggressively seeking to develop new products for the ever-changing semiconductor industry, Teradyne relied on earlier product innovations to maintain its market share.

By the late 1970s, the damage had been done. Teradyne had ignored the development of digital large-scale integrated circuits (LSI), which meant that it missed out on an ATE market that expanded by 35 percent every year of the decade. In addition, because of this omission, the company was way behind in bringing state-of-the-art testing systems to market. In an effort to redress this error, d'Arbeloff began an aggressive program to develop new products in 1976. Over the next four years, Teradyne's spending on research and development grew dramatically, from $5 million to $17 million.

Despite these steps, Teradyne relinquished its dominance in the ATE market in 1978 to arch-rival Fairchild Camera and Instrument Corporation. With this ominous sign, amid a general perception that Teradyne had missed the boat, important managers and salespeople began to leave the company. One group of ex-employees brought out their own testing device and gained half of the market Teradyne had previously held.

In the early 1980s, Teradyne continued its quest to regain market share through new product development, even as its financial results slipped. Although an industry-wide recession cut the company's sales by three percent in 1980, and earnings dropped from $11 million to $4 million in 1981, Teradyne raised research spending to $20 million. By 1982, research spending had reached $25 million, or 14 percent of sales. In order to pay for this effort, the company went into debt, racking up $66 million in long-term notes.

The centerpiece of Teradyne's costly development program was a tester for the next generation of semiconductors, very large scale integrated (VLSI) circuits, called the J941 logic test system. In late 1982, Teradyne received an early vote of confidence on this offering when it won a $1 million contract from the Intel Corporation.

In addition, Teradyne had developed several products to appeal to a broader customer base, as part of its perennial effort to lessen the impact of cyclical depressions in the chip market. One focus was the telecommunications industry, where the company had installed five of its 4Tel systems by 1977. In 1981, Teradyne netted its largest ever contract in this area, when the GTE Corporation signed on to buy a $35.6 million 4TEL system.

By 1983, Teradyne's effort to introduce a new generation of products had started to pay off. Sales for that year increased by 42 percent, to $250 million, and income multiplied by four, to $21 million. Despite these gains, the company still faced stiff competitive threats from others in its industry, primarily Takeda Riken, a Japanese chip testing company.

Within two years, aggressive price-cutting by Japanese microchip manufacturers, combined with lowered demand for personal computers, had once again depressed Teradyne's fortunes. In August 1985, the company laid off 140 workers; 1986 also proved to be a year of poor financial returns. In 1987, Teradyne racked up $21.1 million in losses, marking the first time in its history that it had lost money for two years in a row.

Teradyne found itself trapped in a market that had changed forever and was forced to adapt to the new conditions. The Japanese had successfully captured much of the U.S. semiconductor industry, and the remaining American players were locked in a protracted recession, which had eliminated profit margins for all of them. Teradyne began to compete for business in ways it had never before found necessary. The company started trying to undercut its competitors on price and also relied heavily on its diversified line of products, which included mixed-signal test systems, analog test systems, and memory test systems. In addition, Teradyne worked hard to sell its products in Japan.

On the strength of these areas, Teradyne managed to cut its losses to $3.29 million in 1988. Only 65 percent of the company's revenues that year came from its ATE business; the rest were derived from other areas, which included a computer-aided engineering (CAE) group created through the purchase of the Aida Corporation (for $29 million) and Case Technologies, Inc. (for $18 million), the previous year.

By 1989, Teradyne had returned to profitability, as the company earned $10 million on sales of $483.5 million, despite the continued overall slump in its industry. Analyzing this situation, d'Arbeloff prioritized competition on a global level as his company's best chance for ultimate survival. While the overcrowded ATE industry kept margins narrow in Teradyne's main business sector, the company profited from its thriving telecommunications unit and its connection systems business, a big defense contractor.

Unfortunately, the defense industry proved a weak customer as the 1990s began. In October 1990, Teradyne undertook a round of layoffs, as its sales to the military plummeted. In April 1991, the company continued its cost-cutting efforts, implementing salary freezes and briefly suspending production, while also buttressing its overseas operations in its drive to return to profitability.

By the end of the following year, Teradyne's restructuring had resulted in strong financial returns. The company reported sales of $529.6 million and earnings of $22.5 million. In 1993, the good news continued. In August, Teradyne's efforts to become a global player paid off, as the company won a massive $63 million contract to supply test equipment to the German national telephone system. Exports accounted for 40 percent of Teradyne's sales by this time.

In addition, Teradyne introduced a new generation of ATE, which tested application-specific integration circuits, enabling chip manufacturers to produce semiconductors more cheaply. This development came as the demand for computer chips increased dramatically following a new wave of personal computers which met the industry's diminished capacity. Teradyne ended 1993 with a record backlog of orders for its equipment. Overall, sales had risen to $554.7 million, and earnings had reached $35.2 million. The company looked forward to garnering continued strong returns.